Saturday, January 17, 2009

As our contango idea from a few days ago has caught some media attention we wanted to make some elaborations. The premise for that post was to show that based on 10 minutes of google searching and some DIY supplies, one can exploit the contango. If one is industrious enough, one could probably circumvent or cover the transportation, insurance and labor costs and still be at a profit. For industrial-grade profits however, Stamford, CT may not be the best location. The way the big boys are playing this is two-fold:

1) They fill tankers full of crude and store them (or keep them movable with no destination per se, just making sure the hull doesn't rust and what not). Some of the big names doing this are Citi's commodities trading unit, BP and Royal Dutch. A favorite spot to anchor your tanker is off the Orkney Islands in North Scotland or off the coast of Louisiana. For an interesting perspective see here. Companies likely to benefit from continuing contango are Phibro LLC which has a track record as hirer of tankers, and Frontline, the largest owner of supertankers.

2) They dump the oil in Cushing, OK. The town of 8,000 is in the middle of nowhere, but is where all West Texas Intermediate contracts are delivered. There is nothing memorable about the town except the hundreds of huge oil storage tanks which can store up to 35 million barrels. In a period of contango, the tanks are full waiting to be unloaded at higher contracts in the future. Wall Street companies that have a monopoly over the storage business in Cushing are BP, Enbridge, Plains All American and SemGroup (well, this one not so much any more), while other global players include Vitol and Morgan Stanley.

(Cushing, OK storage tanks)

So before people rent out warehouses in the tri-state area, they may want to consider purchasing a cheap second-hand tanker or renting out some reservoirs in the middle of the heartland.

*********

Tomorrow - we pick up on the reason for the huge contango and how, aside from blaming the usual OPEC and hedge-fund suspects, airlines such as Southwest, JetBlue and Delta (which are underwater on forward oil hedges to the tune of billions of $) are likely culprits as well due to their meeting of margin calls in cash and weighing in on the light volume near-term crude market.

The market is crashing, the S&P will hit 500 soon, Sotheby's stock is plummeting: is there any way to invest in artistic assets in this environment? Our recommendation - get on the prebuy list for Geoffrey Raymond. The modernist artist who exploded on the scene by painting and then having ordinary people annotating portraits of Jimmy Cayne and Dick Fuld will likely have years and years of scandalous work subjects. Based on his current portfolio he will not be suffering from painter's block any time soon. His early Dick Fuld sold for $10,000, current pieces are going for $30k+. At this rate we expect to see Geoffrey's art easily overtake the garbage that Damien Hurst was peddling to billionaire ponzi schemers. Granted the hype of the Annotated Madoff's will likely come and pass but vainglorious semi-billionaires will still be happy to shell out a lot of money for time-defining pieces such as Black Warren.

After all - would you rather keep your money in cash once hyperinflation hits, in Treasuries where you pay the government for a mattress alternative, in Banc of America which will be nationalized any moment, or in relatively cheap art which can only go up?

WSJ reports ($$$ here) of another one. Seriously now, they have hedge funds in Idaho? I think we have reached our saturation point - one a day now, soon to be dozens: 34 of the 1,684 hedge funds reporting quarterly results have never had a down quarter (you listening SEC, you may want to do something here proactively).
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It has been 4 days since we demonstrated Zimbabwe's recently issued $50 billion note... Press reports indicate that deflationary attempts in this Southern African country have failed and Zimbabwe has decided to introduce a $100 Trillion note. We have no clue how the 14 zeros manage to fit on a small piece of paper (this is British numerology). The new note is worth roughly US $33 today and a few cents tomorrow. In the meantime U.S. printing presses work overtime to catch up.

In the meantime, wife of the totally nutso dictator Mugabe has been seen carting wheelbarrels of the new specimens to stores in Hong Kong, much to the chagrin of the thousands of Zimbabweans dying everyday from cholera. Way to go United Nations.
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The WSJ reports ($$$ link) that Mexican billionaire (or is that millionaire now, we need to double check) Carlos Slim Helu may bail out the New York Times. The Mexican who bought 6.4% of the company 4 months ago, at ridiculously higher prices, may be the last chance for the newspaper publisher, which is doing everything it can to raise a few bucks, including a sale leaseback of its HQ building and is considering "various other financing alternatives including private placements".

Couple of questions. Where is major shareholder Phil Falcone in all this. More importantly, where is Scott Galloway, our winner of the "There can be only one" nomination. Lastly, will the Sulzbergers, who watch as their crumbling empire is worth less and less each day, be willing to cede control? We will know soon - the clock is ticking on the May 28 maturity of a $400 million Term Loan. In the meantime, if you are a gambling person, take a look at some NYT CDS - wrapped around 1000, it is roughly 3000 bps cheaper than fellow Death List participant McClatchy. On $10 million notional you would make a cool $4.3 million if the two end up trading side by side.

"Bankrupt but not really" carmaker, General Motors, which has already likely burned thru the $13.4 billion in taxpayer money it received a couple of weeks ago, is poised to keep the fire going a whole lot longer. Both holders of over $27 billion of corporate debt, as well as the United Autoworkers Union, are aggressively taking advantage of the government's insistence that the company is too big to fail, and have decided that they are not going to negotiate the concessions needed of them. Ray Young, GM's CFO, has said the company "may not be able to secure the agreement of all bondholders for the proposed debt for equity swap." As part of the original TARP release of critical funds, the company is supposed to force bondholders to accept a 66% reduction in existing debt, which means for every dollar invested, bondholders can hope to recoup at most 33 cents. Same thing goes for the UAW, which is expected to agree to receive less than the current $70/hour all in benefits.

In a brilliant demonstration of communism, the government has already demonstrated it will not let the company fail, so neither bondholders nor the UAW feel pressured by the threat of an all out bankruptcy. This game of chicken will likely last until everyone but the US taxpayer gets what they want.

All this should make for an interesting showdown between all the involved parties and the soon to be appointed car czar, Steve Rattner. In the worst kept secret on Wall Street, the head of private equity firm Quadrangle, will soon become judge, jury and executioner of the U.S. auto industry. Due to his very substantial ties to the Wall Street community it would not surprise us if he ends up siding with the likes of Bill Gross and Larry Fink who owns a huge part of GM bonds. It would be even less surprising, when one considers that Rattner's economic priorities it seems are the continuation of the current trend of taxpayer-bails-everyone-out thinking (although he does have a good point about the biggest Ponz of all time: Social Security, 1000 times bigger than Madoff). Bottom line: like a good Joker, we expect him to idly supervise the wholesale arson of much more taxpayer money. We would be happy to be proven wrong.

Friday, January 16, 2009

While this is not quite as dramatic as Schrenker's insane plane-crash stunt, or at least not yet, the new Ponzi runaway story is all over the news. This time it is Art Nadel, a potentially demented, statistical arbitrage whiz-kid. While at first glance this seems to be an isolated case of a 75 year old guy who had likely misplaced his dentures, but who nonetheless had been running a "prize winning black box" fund, we fully expect to find a connection to Madoff, Madoff's extended family, Dreier, Schrenker and all the brothers and sisters of Kappa Beta Phi.

Art Nadel, 75, money manager for Sarasota, FL, based Valhalla Management is under investigation for investment and asset theft.Art disappeared on Wednesday afternoon; his disappearance was reported by his wife Peg who had last seen him at 8:45am on Wednesday. Two days later the police launch an investigation.

Nadel left a note that was recovered after his disappearance. Contents of said note have not been released by authorities.

Wife Peg Nadel and son Geoff Quisenberry said they would not comment on the assets under management, the number of clients, how much had been lost or whether it is even accurate to call it a hedge fund.

Nadel is fleeing in a green Subaru.

Detective Bill Splitter says "We're dealing with a substantial amount of money that has reportedly been taken from many investors".

Among the high-profile Sarasota victims are the Sarasota YMCA foundation, and at this point they have been told their money is gone.

Valhalla investors had been told their investments in the fund had earned over 8% as of November.

In addition to Valhalla, other umbrella funds implicated are Viking and Scoop management.

Neil V. Moody, 70, who is president of Viking Management, released a statement to investors on Thursday confirming funds had disappeared: "Unfortunately, just yesterday afternoon we became aware of an extremely serious situation suggesting that the funds may have virtually no remaining value".

Moody is telling clients that Nadel did all the fund trading, and that Moody had no idea anything was wrong until this week.

Bloomberg reports that Charter Communications, which as we noted, did not pay its Jan. 15 interest payment and has hired Rick Cieri and his mega-bankruptcy law firm Kirkland and Ellis... What boggles is why the company has hired Lazard as financial advisor after their deplorable failure to procure a DIP loan for Nortel, leading to its Chapter 11 filing. The 3rd largest cable company in the U.S. , which serves some 5.5 million soon to be TV-less customers in 27 states, will imminently provide a variety of "diligence" trips for Lazard to its St. Louis headquarters, although according to this the A-list bankers will undoubtedly prefer to be staffed on the Nortel deal. And, as we expected, Charter will file with a boatload of cash, a little over $900 million to mitigate for the lack of interim bankruptcy funding.

Charter, whose chairman and biggest shareholder (don't mean much when the stock trades at 12 cents) is Microsoft co-founder Paul Allen, has never been profitable since going public 10 years ago.

Other advisors who will join the vulture-fest, are financial advisors Houlihan Lokey and Miller Buckfire, advising bondholders and Paul Allen, respectively.

With over $16 billion in debt and a lot of pissed off bondholders, this will likely be one messy bankruptcy.

In totally unrelated news, Jose Mourinho, coach of Italian soccer powerhouse Inter Milan, has told his troubled stiker Adriano that he is fat and he needs to lose weight if he wants to play for the team. "It is clear that he is (six to nine pounds) overweight and he lacks some explosiveness and confidence." Now that is some motivation talk.

Next up: Stieve Cohen telling his traders they are being furloughed until they lose 50 pounds or have hormonal therapy to achieve their target figures.

After dropping as low as $6/share, BCS recovered most of its losses and traded as high as $8, before dropping again. Barclays management "We know of no justifcation for share-price decline". It also expects to report pre-tax profit well ahead of the $5.3bn analyst estimates...

Tha company has been put under review for a downgrade by Moody's.... What can you say - always one step ahead of the crowd. Their Prime Rating is most at risk at A-2. If this gets whacked several notches, no more access to commercial paper... Oops

*********UPDATE**********

Moody's just downgraded Banc of America/Merrill Lynch senior rating to A1 from Aa3. Kinda like Lehman was rated A1 on the day of its bankruptcy.
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Buy: Barrels of Oil (we do not have a position in this "security" so we hope the SEC does not bust our front door in an hour for position peddling)

Why? You pocket $25 RISK FREE per barrel for just holding on to it for 11 months

What is the Catch? U need a place to store a couple of barrels of oil...

What is the CNBC Catchphrase?Contango

What is the math? Buy oil for February physical delivery (perfect, gives you time to organize this brilliant strategy), with the goal to sell it in January 2010, for an 11 month holding. According to most recent NYMEX quotes, you pocket exactly $25/barrel doing this trade.

Some geometry. A Barrel of Oil, is a standard volume measure equivalent to 42 gallons, or 158.9873 liters for our 2 European readers. This "black gold" is stored in 55-gallon drums, which have dimensions of roughly 24" by 34"; while traditionally these have been made of steel, you can buy plastic alternatives. Since you don't care about the quality of the drums you can buy used drums. According to this Craigslist seller you can buy bulk used drums for $8/each. The average circular barrel takes up on average 4 square feet in area and is roughly 3 feet high. You can stack barrels as many as you need high, limited by the height of the storage facility.

Next you want to find an average sized warehouse - presumably somewhere cheap, let's say Stamford, CT, which is terrific for two reasons 1) most of our readers are in the greater Stamford area, and 2) if there is a leak, you will pollute not some endangered crane breeding ground, but the domiciles of some of the richest people in the US. Elsewhere in the country, rates will be cheaper. According to this link, you can rent a 2,200 sq/ foot warehouse in Stamford, CT for $3000 month (this assumes no haggling). Plugging all these variables in the below spreadsheet, and you end up with a risk free profit of $41,800 over 11 months without moving your finger... And this is a scalable and leverageable idea - meaning you can potentially book unlimited profit, as long as you can find the storage, the barrels and someone to finance it if you don't have the upfront costs. Even if inflation has a "hyper" prefix at some point over the next 11 months (which we at Zero Hedge are very concerned about and believe it might happen), you will still be locking in a real profit.

Are we missing something, or is the market so dislocated there are just insane pockets of value... We think the latter... What is your take?

We are happy to inform you that Chrysler Financial (aka Stephen Schwarzman of Apt. 15/16B at 740 Park) is now the proud recipient of your money.

The massive tax funnel known as the Treasury has decided to burn $1.5 billion in yet another retarded venture. You can now run to your nearest Chrysler dealership and get that PT Cruiser you have been dreaming of for so long for a 0% financing.
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Pfizer cutting 2,400 jobs or a third of its total workforce, AMD is slashing another 1,100 people, and GE Capital is laying off 11,000 or 10% of its workforce. Presumably the newly laid off can be placated with a year-long supply of Viagra, free computer with internet connectivity and free access to a $1 million DIP to finance their own bankruptcy petitions... We can imagine the resulting mess...
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Bloomberg, citing the uber-dependant "person", reports that Microsoft's manic-depressive boss Ballmer has met with Yahoo's Chairman Roy Bostock in New York. Preamble to new marriage bells? We will keep you posted.
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Hertz is firing a lot of very bored, airport rental lot operators. The heavily leveraged auto rental company (CDS in the 1250's last time we cared), is hoping firing a third of its workforce (as compared to August 2006) will make it profitable. Nonetheless, Mark Frissora, CEO, is not unduly optimistic: "Volume, pricing and residual values continued to decline during the most recently completed quarter, and we cannot predict when our markets will improve." He adds total liquidity at Dec. 31, 2008 was $4.9 billion, so Hertz will likely not be on our Death Watch any time soon (although we have been surprised in the past).
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Circuit City will not pass go on its way to the garbage heap. Despite rumors that it had found outright buyers for its stores, including such PE companies as Golden Gate Capital and Ricardo Salinas Pliego, Circuit City today filed a notice in bankruptcy court that it has hired liquidators and is unable to reach a pact with creditors. In a trend proudly started by Apollo portfolio company Linens 'N Things, retailers seem to have given up on reorganizing in chapter 11 and go outright to 7. This fits with our assumption that Chapter 7 is the new 11. Circuit City's bankruptcy case is 08-35653 in Eastern Virginia Bankruptcy Court.

Hopefully this means that the Circuit City store on 42 and 5th will finally have some good deals.

Mortimer Zuckerman and Michael Steinhard are quoted as saying this whole Madoff ponzi shizzle "shouldn't be considered a Jewish scandal just because there were a large number of Jewish victims". Per a Bloomberg article, the two made comments at a Manhattan panel discussion last night called "Madoff: A Jewish Recoking". Among the 250 participants was everyone's favorite Pershing Square Capital manager and monoline fraud exposer, William Ackman. To quote Zuckerman "It's unfair that Madoff's Jewishness has become part of this narrative. Late Enron CEO wasn't called a 'prominent Protestant energy fraudster', and Illinois Governor Rod Blagojevic hasn't been identified in news coverage by his ethnic origins". Steinhardt said he feared Madoff could revive anti-semitism in the U.S.; Steinhardt should know - after all he founded his hedge fund in the distant 1967, when probably the only other HF around was Bernard L Madoff Investment Securities.

Ezra Merkin's "Jewishness" wasn't lost on the panel either. Speaking of Merkin, Ackman said "I think he is an honest person, an intelligent person, an interesting person, a smart investor."

Even though Woody Allen was absent to provide comic relief, Dr. Ruth Westheimer, summarized the situation eloquently "We are all concerned to go on a miserable and cold night to talk about it. That's what we Jews do. We don't sit home and stew".
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Good to see we are on to something. In our breaking expose from Wednesday we presumed that there is more than meets the eye with Frank DiPascali and Charlie Wiener, the other, heretofore secretive Lipstick building 17th floorites. Today Bloomberg reporters seem to agree and have expanded on our initial discoveries... We are quite impressed by the quality of their diligence but I assume you have ways and means when you are actually getting paid for your sleuthing (ahem, management). Not too many major revelations though: their Bridgewater, NJ home is assesed at $1.38 million (btw, Zilllow valuations are roughly 6-12 months old, so take off a zero here and there), Frank likes black Mercedes, dark sunglasses and snowblowers, and like Tim Geithner is not a big fan of paying taxes. Also, due to his Howard Beach origins (of East Coast Watts Riots fame), Bloomberg is tongue-in-cheekly saying the man is obviously linked to the Italian mafia... Curiously another Madoffite emerges, in the face of Robert Cardile, Frank's brother in law, who also was working for Madoff beginning in 1985.

We suggest our friends at Bloomberg follow up on Charlie next... We think there are much more juicy details on this man, who potentially ripped off his own mother's (and Bernie's sister) life savings.

Thursday, January 15, 2009

A long, long time ago...I can still rememberHow the Dow Jones used to make me smile.And I learned my trade and had my chanceThe music played I did my danceAnd I made seven figures for a while.I can't remember if I criedwhen they pulled the plug on Countrywide...It sucks that Iceland is out of ice....Bye, Bye to my piece of the pie...Now I travel coach whenever I fly...Maybe this will be the day that I die.

Looks like the commercial mortgage apocalypse is about to claim its next victim, this time in the form of the appropriately numbered 666 Fifth Avenue building, home to such previously flourishing tenants as Citi Private Wealth Management. Now that private wealth is no more, Citi has decided to take a hike and has so far vacated over 80,000 square feet of space (and since it has over 482,000 sq feet in the building, one can bet it has a ways to go). As a result, the building's DSCR (or ratio of rent generated to interest owed for us non mortgage bankers) has fallen to an abysmal 0.69. Even when taking into account the $98 million (or much less) reserve fund the building has set aside to cover rent shortfalls, one can assume it won't be long before the 666 insignia again prominently graces the roof, especially since it would have to replace a laughable Citi sign.

The building was purchased from TishmanSpeyer in December 2006, for $1.8 billion (all of it financed with debt) the highest price ever paid for an individual building in Manhattan, by Jared Kushner. Jared is prominent in the gossip pages for not only owning the gossip pages (he is owner of the New York Observer, which he purchased for $10 million at age 25), but for being wise beyond his years (a grizzled veteran at 28), for having good taste (he is engaged to Ivanka Trump), and lastly for being the son of Charles Kushner. One could say Tishman made out like a bandit on the sale, if only it hadn't used to proceeds to go and buy Stuyvesant Town for $5.4 billion, which is now also on the verge of bankruptcy.

Says Kushner "We are well capitalized and conservative and feel confident that we will do well with this over time.” He adds, “There’s eight years left on the debt, and we have $100 million in reserve so any inference that this building is in trouble or distressed is ridiculous, even in this crappy real estate market." Kushner forgets to add that he personally has no equity invested in the deal, so if he is wrong, it is only illiterate CMBS investors who will suffer by having their sizable debt investment wiped out.

Interestingly, another tenant of the building, is none other than Ezra Merkin's14th floor neighbor. Mr. Englander's Millennium management, which has so far been spared the hedge-fund decimation that is pervasive amongst his peers, may be forced to look for new digs if young master Kushner decides to hike the rent for any remaining tenants in the building.
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As previously reported, Steel Partners is trying to stick it to investors by unilaterally deciding to do a reverse merger something or another, ultimately to prevent investors from redeeming in a pseudo-liquid public vehicle called WebFinancial Corporation. Now it seems this plan may be derailed by none other than corporate board bogeyman Carl Icahn (who recently posted an interesting analysis on amending bankruptcy laws that would make our earlier post about the half a thousand Lehman lawyers redundant). The corporate raider, an LP of Steel Partners II himself, has filed a lawsuit against Warren Lichtenstein and his fund in Delaware Chancery Court case # 4284-CC, Bank of America NA et al vs. Steel Partners II Offshore Ltd et al. with Judge William Chandler, claiming Steel is committing fraud by going thru with the reverse merger without obtaining prior approval from, or even notifying, investors.

In the suit Icahn is seeking his $15 million July 2005 investment (thru vehicle ACF Industries), as well as legal fees and damages, and, what is scarier for Warren, a court-appointed custodian to manage Steel Partners LP. With Icahn spearheading the charge, it is only a matter of time before all other investors join in litigation against Steel Partners, making the proposed deal impossible and likely clearing way for full redemptions.

So much for this brilliant approach to halt redemptions. Next up on the drawing board-reverse-SPACs.

The Wall Street Journal reports that HeidelbergCement, whose CDS jumped by about 300 bps since when we wrote about the brewing troubles at the German cement maker, may be bailed out by Goldman Sachs and TPG who are allegedly considering buying a stake, while French buyout house PAI is evaluating its own investment.

With Adolf Merckle's 25% stake currently in limbo an acquisition would make sense. However, with the CDS trading at an implied 50% chance of default within a year, and suitors will likely need to do a global recap as part of an acquisition which will need to eliminate at least half the outstanding debt for this to continue as a viable concern. Either way, the CDS should be an interesting play as it could move quite aggressively in either direction as this saga develops.
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A Bill introduced today by House Democrats, highlights the $825 billion stimulus plan that is supposed to lead America out of its current deplorable state. This will undoubtedly cause ripples in both the Congress and Senate as the fight for the spoils begins.

In a nutshell the proposed package consists of $275 billion in tax cuts, which may prove problematic with Republicans as it is less than the 40% of the bill that was supposed to win GOP support ($330 billion).

Infrastructure: $32 billion for transportation projects, $31 billion to build and repair federal buildings and other public infrastructure, $19 billion in water projects $10 billion in rail and mass transit projects.

Education: $41 billion grants to local school districts, $79 billion in state fiscal relief to prevent cuts in state aid $21 billion for school modernization; $16 billion to boost Pell Grant; $2 billion for Head Start.

The previously scheduled January 20 conference call is being pulled to January 16 Friday bright and early at 7am. Ken Lewis undoubtedly has many good news he cant wait to share. At least it is not at same time as Citi (8am), or one would think one is trying to hide behind the other... which is simply ludicrous
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Apparently the plane is an Airbus 320 flying from LaGuardia to Charlotte, NC. The plane is semi-submerged in the Hudson River and is "slowly sinking". According to the US Airways website this is flight 1549. Media reports there were 148 passengers and 6 crew members onboard when the plane crash-landed into the river. The plane struck a flock of geese on take off. The crash occurred off of 50th street in Manhattan. According to the FAA everyone on the plane is safe and off the plane.

Death Watch candidate, greenhouse tomato producer and employer of illegal immigrants, Eurofresh Farms, does not disappoint. The Company earlier filed an 8-K saying it will not pay interest on its 11.5% Senior Notes due 2013, but before bondholders scream bloody murder, "the non-payment does not constitute an event of default under the indenture" and that this is just a testing of whether this whole grace period things works....kinda like exactly a year ago when it did the same thing. Furthermore, Eurofresh "has initiated a strategic alternatives review process to take advantage of current market opportunities to enhance the capital structure." Well, they obviously know something Lazard doesn't cause last time we checked "market opportunities" thought that Nortel wasn't a very appropriate DIP candidate. It is likely that secured lender Silverpoint will just say enough, and take over the few hundred or so tomatoes that its secured credit facility is financing.

Apparently Alvarez and Marsal has been hired to succeed where Lazard has failed.

CNBC reporting that Banc of America to receive more tax money to fund their phenomenally well-run operation. With purchases such as Angelo Mozillo's golden parachute and Merrill Lynch's empty cubicles this makes lots of sense. Looks like federal guarantee will be $100-$200 billion...

With the U.S. government unable to print money fast enough, and "sophisticated" investors rushing to buy every bond Washington will peddle to fund the upcoming multi-trillion budget deficit, Zero Hedge has decided to make life easier for everyone and provide a cribsheet for all upcoming Bill, Note, Bond and TIPS auctions. We wish everyone the best as they earn negative 2-100% real interest rates on their investments.

S&P posting a 20 point rally in past hour. Talking heads speculating this is due to expections of more taxpayer money about to come and bail everyone out via TARP 2 any second. This obviously did miracles last time around.
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According to sources, the indenture trustee on Six Flags' 12.25% Notes due 2016 has confirmed that a $24.5 million interest payment on the notes was made. This buys the company a whopping two weeks before it has to make its February 1 coupon payment on its 8.875% Notes due February 2010. If the Company decides not to pay that particular coupon, it will have paid $1.6 million a day to keep operating out of bankruptcy between now and then.

DETROIT, Jan. 15 /PRNewswire/ -- General Motors today provided an update on company restructuring efforts included in the viability plan submitted to the federal government last month, and announced more conservative industry volume planning assumptions to ensure the viability plan is successful even in the most challenging of markets.
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Insider trading powerhouse Blackstone has been granted some relief over its scuttled $6.6 Billion acquisition of Alliance Data Systems, and Delaware Chancery Court Judge Leo Strine has ruled they are off the hook for the $170 million break up fee.
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A notice sent out yesterday to all known and unknown lawyers involved in the "biggest bankruptcy of all time" can be found here.

Lawyers A Thru C, for full list click above

Since we at Zero Hedge have lots of free time, we decided to count 'em and came up with a grand total of 513 lawyers! Do all these people need to be involved in the case? No. Are all of them providing any benefits? Of course not. Are they all getting paid by the company's creditors as its estate they "help" unwind? Most definitely. Even Judge Peck's head is starting to spin with all the associated legal costs "I'm deeply concerned about the overall costs and expenses of this case," Peck said. "Just because the case is large, doesn’t mean the case should be viewed as a blank check for professionals."

In the meantime, finance professionalw who have a morbid interest in Lehman events pre- and post-petition, and would like to be considered for the examiner post, should submit their resumes to U.S. Trustee Diana Adams who is currently interviewing candidates for Dick Fuld's future executioner.

Speaking of lawyers, Milbank Tweed, whose official status in the case is to counsel the official creditor committee (i.e., provide the guys who have lost gobs of money with information, not just monthly invoices), is doing all it can to limit how much information becomes available in the case, while an unlikely hero for the creditors is emerging in the face of New York Comptroller Tom DiNapoli. DiNapoli himself is in some deep doodoo, as the New York Pension fund that he manages has lost over 40% in the past year and seems hell bent on recovering at least some of that: whether or not he is successful before he has to tell thousands of policemen and teachers that their retirement funds are, well, gone, is unknown.

But back to Milbank - much to the chagrin of Judge Peck himself, Evan Fleck of Milbank argues that the examiner should have a narrower job description than being endowed with a "broad scope" of powers, to which Peck's response is that he has a "cognitive problem" with limiting the examiner's report to just facts. "Any useful investigation would have to be colored by some form of judgment." ($$$ link here) Why Milbank, who, contractually, should be interested in getting as much info as possible, is pushing hard to keep developments under wraps is a bit of a mystery to us. But then again, in this case, where every motion has been steamrolled with blistering speed and where the only beneficiaries have been select insiders, and where Peck has been signing off on wrong decision after wrong decision with the same aplomb as Henry VIII used to sign divorce papers (from the original sale of the Lehman brokerage unit to Barclays for pennies, after Barclays declined to buy Lehman outright in the day prior to filing, to the subsequent sales of the R3 and Neuberger Berman investment unit to ex-Lehman professionals) nothing surprises us any more.

In a Bloomberg TV telephonic interview, Christopher Whalen, managing director of Institutional Risk Analytics, discusses the possibility that Citi may file for bankruptcy, which according to him is "inevitable". Our advice to Vikram regardless of what he does - don't hire Lazard if you need a DIP.
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Zerohedge has invested its collective $0.69 (this by the way is also our disclaimer that we are unabashedly pushing our book) in the SRS ETF. SRS is an ultra short fund, double inverse tracker of the Dow Jones U.S. Real Estate Index. We would post the links that disclose the current state of the U.S. residential and commercial mortgage markets but frankly unless you have been living in 740 Park for the past 2 years, you should have an idea by now.

Technicals are sweet, with this baby hitting $260 the last time Citi was at this price so there is some nice post short squeeze upside... Top 10 Index constituents of the 79-company fund, are such future DIP hunters as Simon Property Group (7.76%), Vornado Realty (4.69%), Public Storage (4.56%), Equity Residential (4.31%), Boston Properties (3.99%), ProLogis (3.87%), HCP (3.59%), Plum Creek (3.08%), Kimco Realty (2.90%) and Avalonbay (2.71%). The P/E ratio as given by proshares is 15.89x, and a 5.28% dividend yield... We would probably recommend selling once it hits the low to mid 200s for a nice 3x return. Start buying.

According the the Globe and Mail, the main reason Nortel decided to file for bankruptcy was Lazard's pathetic inability to raise even a dollar of Debtor In Possession financing.... Just for that we will go thruLazard's court-filed fee applications with a fine-toothed comb, scouring for any expenses at these select Toronto establishments. As Zero speculated three days ago, the DIP market has ceased to exist, and no amount of TARP funding will force banks to lend, even when it comes to super secured loans, even when the interest rate that can be extracted would be considered usurious if people still cared about that thing, even when the creditor is such a formerly-legendary names as Nortel Networks.

Sources said "said the company's board opted for court protection because it was unable to raise conventional bankruptcy loans, known as debtor-in-possession or DIP financing. Typically, banks are eager to make DIP loans because they charge high rates and rank as one of the best-secured loans, but during the deepening credit crunch few banks are willing to lend well-protected loans to distressed borrowers. Without a DIP loan, one source said, Nortel's board opted to file for protection while it still had a large cash reserve and before it was required to pay more than $100-million Thursday to certain bondholders."

M&A bankers who recently left their posts in droves to join restructuring advisories in hopes of catching the upswing of the next bubble, may be left in the cold as Chapter 7 (where monthly retainers are non-existent) becomes the new Chapter 11.

Smurfit Stone Container tells lenders it is likely filing for bankruptcy. Notes down 9 points to the single digits. Bloomberg notes that SSCC CDS in bps equivalent is roughly 19,000 over Libor... That'a a lot. They also juxtapose it to TIN, IP, and WY, all of which are sub 1000 bps, which could be read inversely as saying those three CDS are damn cheap

Wednesday, January 14, 2009

With the public's attention having been exclusively focused on Bernie, his sons Marc and Andrew, and Bernie's "three-man accountant company" lead by David Friehling, a question that is intriguing more and more people is who/what/where are Frank DiPascali, the 51 year old CFO of Bernard L Madoff, and Charles Wiener, Bernie's 50 year old nephew, listed as Director of Administration, who were the only other tenants on floor 17 of 885 Third Avenue.

According to his Brokercheck profile, Frank is still currently registered at Bernard L. Madoff Investment Securities LLC, CRD# 1527021, he is in fact "Jr", there have been no disclosures or suspensions filed against him (unlike his boss, whose crib sheet is quite prolific). Like a diligent schoolboy, Frank passed his Series 7 on June 21, 1986. Frank has been employed by Bernie since September 1975, over 33 years, meaning he joined when he was 18. On December 23, WSJ profiled DiPascali, who is represented by attorney Mark Mukasey, a high profile trial lawyer from Bracewell Giulianni. While DiPascali was quoted as saying that he "would like to see investors get back whatever they can", an SEC memo claimed that Frank has "responded evasively" to questioning after the regulators showed up at the 17th floor of the Lipstick building.

Frank is married to Joanne DiPascali of Howard Beach who is an employee of JP MorganChase National Association, the private banking arm of JPM. As noted here, Joanne works out of JPM's Iselin NJ office, which is where the firm's mortgage business is centered. In this March 29, 2006 memo, the Iselin office provided its 2 cents on just how smoothly the Nontraditional Mortgage Product market is operating. As seen in the following representative prospectus from a 2007 mortgage pool offering by that office, of the $473 million mortgage pool peddled probably by Mrs. DiPascali among others, only $181 million of mortgages had verification checks, $440 million are IOs and average outstanding balance is $476,000...So plot thickens - husband is chief financial officer to a ponzi as wife is potentially selling worthless mortgage pools... DiPascalis now live in Bridgewater, NJ, in what seems like a pretty decent house. In his spare time, Frank enjoys marlin fishing on his boat Dorothy-Jo, and he is actually quite good - he participated in the 2008 Mid-Atlantic $500,000 Marlin Fishing Tournament. Not only is fishing a hobby, but it seems to also be a family business (and who knows, maybe a money-laundering operation): since 2002 the couple has been running Dorothy-Jo Sportfishing, which according to manta.com has annual sales of over $230,000...

How about the other tenant of the 17th floor, Charles Wiener, Bernie's sister son. Charlie is registered broker, CRD# 1329906, with no publicly filed adverse disclosures. Charlie passed his Series 7 on 9/21/1985. He has been employed at Madoff securities since May, 1980 - 28 years. Charlie is married to Carolyn B. Wiener, a lawyer. Charles and Carolyn live in Centerport, NY. Carolyn is the Wiener (no pun) in Schaum and Wiener, of 600 Old Country Road in Garden City, NY. Co-founder Martin Schaum himself was in the brokerage business under the name Good-Rate Brokerage Ltd. As noted, Charlie's mother is Sondra Wiener, 74, who lives in the Ballenisles Country Club, a gated Palm Beach Enclave where annual membership costs $35,000-$115,000, and is a stone-throw away from Jupiter Island. Sondra and her husband, Marvin, are neighbors to such celebrities as Serena and Venus Williams. The NY Post recently noted that Bernie scammed even his own sister, and Charlie's mother, to the tune of an estimated $3 million. Sondra was one of the recipients of a Christmas goody bag that was sent under the nose of his overseers, which included $1 million in valuables including Cartier and Tiffany watches. These were promptly recollected by lawyers. On December 19, a week after Bernie's confession, Marvin and Sondra put their 3 bedroom, 2 garage, 3,409 sq. foot home on the market with an asking price of $849,000 (any buyers can call Sandy Pitchford at PalmBeachGardens.com, at (561) 427-7262 - this home will easily have phenomenal goodwill (or badwill) appreciation in coming years). The home was purchased by the couple in 2003, the year it was built, for $650,000. A neighbor is quoted that Sondra "was a victim in this. It didn't seem like she saw it coming. What kind of person scams their own sister?" Or their mother, we would ask.Which would be the case if you are Charlie, and if, indeed, you had insight into you uncle's Ponzi operation. If Charlie is found to be guilty of prior knowledge, one could say that his punishment should be even worse than Bernie's, as the latter at least tried to give his relatives and family members some last minute parting gifts. Robbing your own 70 year old mother of her life savings would be inexcusable... Of course this line of thought presumes that Sondra herself was completely innocent and did not know anything about Bernie's actions, which is also yet to be proven.

Maybe we spoke too early when we said that Shrenker's life story shames Berney . If a high-level investigation into the Madoff octopus reveals so much shadiness that even Mario Puzo would cackle contentedly, one can only imagine what will be revealed when the Feds and the SEC actually stop twiddling their thumbs and do their job for once.

"Team, I am sure all of you saw my letter last week sharing something very personal with the Apple community. Unfortunately, the curiosity over my personal health continues to be a distraction not only for me and my family,but everyone else at Apple as well. In addition, during the past week I have learned that my health-related issues are more complex than I originally thought. In order to take myself out of the limelight and focus on my health,and to allow everyone at Apple to focus on delivering extraordinary products,I have decided to take a medical leave of absence until the end of June. I have asked Tim Cook to be responsible for Apple's day to day operations, and I know he and the rest of the executive management team will do a great job. AsCEO, I plan to remain involved in major strategic decisions while I am out.Our board of directors fully supports this plan."

I want to make sure you know that we’ve moved up our Q4 2008 earnings announcement to this coming Friday, January 16. Since we are ready to release 4th quarter earnings and talk about 2009 and the future, we saw no need to wait.

As I told you yesterday in my video message, economics and psychology are both important in the markets. The economic model of our business is sound and positions the company for success over the long term. The clarity we provide as we report earnings should address the psychology of the market.Until then, here are the things you should know:

* While we are embarked on a long-term transformation of Citi, our core mission is unchanged. Our goal is to streamline our operations,strengthen our balance sheet, position ourselves to take advantage of historic global growth opportunities, and deliver to clients all the benefits of our strength, insight, and unique global reach.

* We are and will remain a bank. We will continue to help clients save,borrow, invest, transact, and we will provide them advice.

* Our commitment to our clients remains unchanged. We will continue to deliver what our clients expect from us. That is our firm commitment.Please reiterate that to the customers and clients you speak with today.

We continue to be focused on creating value for our shareholders and debt holders and restoring profitability sooner rather than later.

Thank you for your dedication, focus, and hard work. I look forward to speaking with you on Friday.Sphere: Related Content

Once the 4th largest investment bank in the U.S., and the house that Dick Fuld built, Lehman Brothers' today posted an update of its reorganization status in an 8K with the SEC. In a very interesting analysis by Alvarez & Marsal, several things become obvious. Among the more noteable are: the debtors' objective is to emerge from bankruptcy in 18-24 months (vs. others' estimates that the unwind of the estate could last as long as 10 years), the total value of planes that Lehman has owned is $164 million and Lehman's artwork adds another $30 million.

Among facts stated which are actually relevant for creditors are:

Total headcount has been reduced from 25,158 at filing 9/15/2008 to 4,142 at 1/1/2009

A&M has 6 asset teams in place with defined tasks/plans

Cash position has grown from $3.3 billion at filing to almost $7 billion on 1/2/2009

Interestingly, total Real Estate Assets, allegedly the rotten fruit that was the cause of all this shebang, were valued at $42.9 billion (of which residential was only $3.4 billion, and the balance is commercial real estates spread among North America, Europe and Asia)

Lehman's derivatives book has been successful in collecting $2 billion in cash as of 1/2/2009; Curiously in the Deriv Book, there was $23.8 billion of receivables at petition with 3,930 ISDA counterparties (of this $14.3 billion, or 1,808 counterparties has been terminated)

Lehman's bonds have recently traded at about 12 cents on the dollar indicating the market is expecting recoveries of around $16 billion on the roughly $150-160 billion of unsecured claims. Seems that if A&M continues doing their job efficiently (which is a change from prior sentiment, with bondholders using some very fancy expletives when referring to Bryan Marsal previously), then these bonds could actually run up quite a bit even in this horrendous environment. Also at 3pm Judge Peck appointed an examiner in the Lehman bankrtupcy case... Depending on just how big of a fan of Dick Fuld the examiner may be, all the actions of the Gorilla taken just before the bankruptcy may end up having a pretty Madoffesque impact on his current freely-roaming lifestyle.

In a first for 2009, a $200 million loan BWIC was distributed earlier this week, indicating the deleveraging of hedge funds' credit books is far from over. In late 2008 BWIC lists (Bids Wanted in Competition) were all the rage, as banks and prime brokerages were freezing collateral pools of funds that had gone under or were in the process of doing so, and selling the component holdings one piece at a time to the highest bidder, which would usually be a substantial discount to market price. The mere threat of BWIC was enough to keep loan prices very low since no manager wanted to buy a name outright in the market, as the very next day he or she might be able to pick it off a BWIC firesale. Despite the huge volume of notional marketed in BWIC (according to some estimates over $20 billion of loan in Q4 alone), the bids many agent banks received were so low they decided to keep the loans on their own balance sheets instead of getting even less pennies on the dollar for their collapsed prime brokeree.

Traditionally the names making up BWICs are more arcane and illiquid, and as such rarely move the market much on some of the most liquid loans/bonds, but on occasion you would find a bid list (Highland's Credit Opportunity Fund liquidation would be a great case in point) full of juicy, liquid names.

The list marketed currently is made up of 74 different loans, with the largest notional on offer being Medial Media Holdings 1st Lien Term Loan at roughly $10 million, and some of the other larger issues contained being BioTech Research Labs TL B, US Cable Coast TL B, DR Horton Revolver, Attachmate Corporation TL and Triumph Healthcare 1st Lien TL (by the preponderance of health-related names this was likely a healthcare hybrid hedge fund). Some of the more popular names contained are Tenneco Tranche B1, American Airlines B2, Movie Gallery TL and CIT revolver.

With all claims that the deleveraging of the market may be over, the quantity of BWICs is actually the best indicator of whether or not this is true. If the market today is any indication stay tuned for a lot more BWICs hitting the tape soon.

I am both saddened and outraged to have to tell you that the SEC has brought a civil complaint today against Ramesh Chakrapani in our Corporate Advisory Services Group, charging him with passing on inside information three years ago about a pending transaction on which he worked as a 30 year old vice president.

We are all shocked by this alleged breach of the law and violation of our firm’s compliance policies and ethical standards. This employee has been suspended and we have told the authorities that they will have our firm’s full cooperation in their investigation into this matter.This is the first time in the firm’s 24-year history that any employee of the firm has been accused of any infringement of securities laws. Abuse of inside information goes against everything our firm stands for. I have personally made it an absolute priority to speak to each new class of analysts and associates about the prime importance of protecting confidential information and guarding against insider trading. Our employees’ absolute integrity at all times and careful protection of any confidential information that comes into their possession have been the foundation of the reputation we have earned for professionalism and ethical conduct in everything we do, and these allegations undermine the many years of good work by all of the rest of us. I am personally infuriated that one person’s behavior could damage our unblemished record built up over nearly a quarter century.

Should you receive any calls about this matter, please refer them all to [redacted]. Because this case is the subject of a pending investigation, we would also ask you to refrain from discussing it with anyone.Sphere: Related Content

...in a Kia Sorrento???? oh the indignity... in what will probably be his last trip in a non Department of Corrections vehicle, Bernie will have to indulge in all the comfort of this Korean creem of the crop...

In seeming vindication of Kudlow's theory that all shall be well, the TED spread is ignoring the slew of bankruptcies, the bottom falling out of the market, Zimbabwe's trillion % inflation rate, Vikram's impending pink slip birthday present, and tightening to 0.98%, its tightest spread in 5 months.
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We say at least 30% of these guys file. Either way it will be a busy day for back offices everywhere as fund flows (or lack thereof) are processed. We will keep a close eye out and will let you know in the next day or two just how the carnage plays out.
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Does anyone even watch daytime soaps anymore? CNBC reporting... More to come

********** UPDATE ***********

Bloomberg reports Debbie Ryan, girlfriend of Sam, is pleading not guilty in helping him escape. She entered her plea before Magistrate Judge Lisa Margaret Smith at federal court in White Plains. Turns out she had been arrested January 9th. She is barred from any contact with Sam and is out on $75,000 bail. She faces a 10 year prison sentence if convicted.
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In an example of what we will be seeing a whole lot more of in the next few days, Flextronics issued a press release, claiming "it has been proactively engaged in executing a risk mitigation plan with respect to its relationship with Nortel for a period of several months. In December 2008, Flex engaged The Blackstone Group as it financial advisor to assist with evaluating the Nortel relationship and planning for any Nortel restructuring strategy." In addition, Flextronics will provide more specific financial details associated with today's news on its January 28, 2PM earnings call. We shall see just how capable Blackstone is at diarrhea containment soon enough. In the meantime we expect a line of Nortel suppliers and clients to come out with comparable press releases, many of which unfortunately will not have been as prepared as Flextronics.

• These are agreements with banks that allow us to borrow up to $400 million under each agreement, or $800 million in total, whenever we need it. We repay what we have borrowed as cash comes in and the amount we can borrow is then replenished.

• One of our agreements will expire in May 2009 and the other in June 2011.

• As we have said publicly on more than one occasion, because we believe we need significantly less than the total $800 million available credit, we do not plan to replace the full $400 million that is expiring in May. There is no need to do so.

• We are in the process of pursuing a sale-leaseback for up to $225 million for some of the space we own in our headquarters building

Where they seem to disagree is whether or not NYT follows in poor Nortel's footsteps in a 4 brief months.

So listen up Scott Galloway, Phil Falcone and Sulzberger best friend Steve Rattner - now is a time to step up, and either dump some more cash in this phenomenally performing business or turn the spin machine on turbo.